the OECD criticizes the abandonment of automatic adjustment in Spain

The Organization for Economic Cooperation and Development (OECD) has warned of the pressure of aging on the sustainability of Spain’s pension system and has criticized the latest reform for having abandoned an automatic adjustment of the pension system as was the sustainability factor to replace it with the so-called intergenerational equity mechanism that, according to known calculations, is not even equivalent to the costs of indexing pensions to inflation.

In its biennial report on pensions, the OECD is quite severe with the reform adopted last week by the Spanish Congress after the repeal of the one carried out in 2013 by the Government of Mariano Rajoy, against which it also charges for different reasons.

It explains that the intergenerational equity mechanism, which involves an increase in contributions (0.6 points) over a period of ten years to face the increase in spending for the retirement of the most numerous generations of the ‘baby boom’, is estimated that will allow collecting 2.3% of the gross domestic product (GDP) in all that time.

The problem, as he points out, is that at the same time the European Commission has calculated that only the indexation of pensions to inflation, which replaces the Rajoy revaluation mechanism in the new reform, will mean an annual cost overrun equivalent to 1.4% per year of GDP in 2030 and 2.6% of GDP also annually since 2050.

The mechanism “does not measure up to the problem”

The head of the study, Hervé Boulhol, emphasizes that the intergenerational equity mechanism “gives a little oxygen in the short term, but is not up to the long-term problem “of the system, and that means that “further measures will be needed.”

“On the horizon of 2040-2050 there is a problem of resources” due to the rapid aging of the population in Spain and that requires “structural measures”, repeats Boulhol, in statements to Efe.

The main flaw, he adds, is that now a proposal is being made “in the medium term and it is not said what will happen next“.

The OECD includes in a chapter on Spain these latest developments in the agreement negotiated by the Government with its parliamentary partners and with the unions, but rejected by both the employers and the right-wing opposition, and emphasizes that in this way they have been eliminated self-adjusting mechanisms, which in his view have a wide range of advantages.

It notes that Spain is part of a minority of countries in the OECD (one third of the total) that do not have an automatic adjustment mechanism and that, according to the authors of the report, “they protect pensions from uncertainties and are less erratic, more transparent and more equitable between generations than discretionary modifications.”

“Automatic adjustment mechanisms,” he underlines, “have the advantage of defining the direction that the regimes should take, knowing that a change in orientation will require at least explanations and will highlight the commitments.”

Spain, among the countries that will have to face “serious problems”

It recognizes that the sustainability factor contemplated in the 2013 reform (although it never came into effect) worked as automatic adjustment but it had a double problem.

The first is that, as was clear in 2019 when the Pedro Sánchez Executive decided to suspend it, it was established without the consensus that would have been necessary for such a device to last, since neither the unions nor the left (then in the opposition) gave their go-ahead.

What’s more, qualifies as “questionable” the rate of revaluation of pensions launched by the Executive of Rajoy, and that resulted in a loss of purchasing power in 2017 and 2018, as it had an impact on retirees when they could do little to increase their income, for example by working more.

As in previous editions, the OECD examines some of the parameters of the system and places Spain within a group of member countries that will have to face “serious problems demographic that will affect the adequacy of retirement pensions, their financial viability or both “.

Very marked aging in Spain

Especially due to the expected aging of its population. On the horizon of 2050, in Spain there will be 78.4 people over 65 for every 100 who will be between 20 and 64 years old, of trading age. A proportion that will only be exceeded in Japan (78.8) and South Korea (78.8).

In parallel, it is estimated that between now and 2060 the population between 20 and 64 years of age will decrease in Spain by more than 25% in Spain, compared to an average of 10% in the OECD.

Spain is one of the countries in which pensions are more generous when compared to the salaries of workers during their active life. The so-called replacement rate (percentage of salary represented by the pension) is 73.9% in Spain for those who have covered the contribution period, compared to 51.8% on average in the organization.

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George Holan

George Holan is chief editor at Plainsmen Post and has articles published in many notable publications in the last decade.

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